Iran: ECB flags households’ real‑income fears as the crux for growth prospects

Brussels – Consumer confidence “has deteriorated markedly” in the wake of the war in Iran and the resulting rise in fuel and energy prices. This implies a lower propensity to consume, which could worsen if the belief in persistent, non‑recoverable income losses were to take hold. This is the finding of an analysis by the European Central Bank, which examines consumption trends following the conflicts in the Middle East.

What has already become apparent is that, for the time being, high-income households – that is, those best able to manage their resources and expenditure – have postponed discretionary spending (luxury clothing and footwear or sports equipment) to a later date, and cut back on travel and non-essential services (wellness treatments and similar services). Lower-income households, on the other hand, have started to cut back on dining out and having a coffee at the café.

The ECB’s economists stress that, for everyone, in the face of the war in Iran, “the shock is shared and directly linked to risks to energy prices, inflation, and real incomes.” This confidence shock “appears to have exerted a dampening effect on demand, which could weigh on underlying consumption momentum.” This means that “additional downside risks could materialise if households were to perceive the real income losses stemming from the conflict as persistent.”

In other words, “if households were to perceive the real income losses stemming from the conflict as persistent and associate them with lower real purchasing power, the initial sentiment-driven slowdown could become more entrenched.” This represents “an important risk” to the economic outlook and the trend in supply and demand curves: a contraction in consumption is looming on the horizon, with consequent repercussions for production.

The encouraging aspect is that, compared with the significant decline in household confidence following the first few months of the war, the general perception has improved slightly. However, it is worth noting that “the close relationship between consumer confidence and consumption growth suggests that there could be renewed challenges to consumption if the recent recovery in confidence were to prove temporary.” The continuation of hostilities therefore does not bode well for the eurozone’s economic outlook.